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Freelance Update - What is an umbrella company?

Freelance Update - What is an umbrella company?

There are many names they go by; umbrella company, payroll organisation, payment specialist… but what do they really do?!

Whatever the ‘impressive, over complicated, trying to sound flash’ name chosen, the services are essentially the same: They payroll staff and contractors.

Now I grant you some of them throw in other services such as accountancy, legal advice, contracts etc, but we’re going to concentrate on the basics here.

Umbrella services – What are they, how do they work, who are they for?

Any worker can use an umbrella service. They don’t have to work for an agency, they just have to meet the conditions of travelling to a temporary workplace. A temporary workplace is defined by HMRC as 'a place of work you attend to perform a task of limited duration or for a temporary purpose’. (maximum 2 years!)

An umbrella company employs a member of staff under an employment contract - it’s a special one, but it’s an employment contract nonetheless. So the worker becomes an employee of the umbrella.

They collate expenses generated from the workers in order to perform their temporary job. For example fuel receipts (for travel to the job), mobile phone bill (for work related calls) and other allowable expenses.

They then use these expenses to reduce the employee’s taxable pay, never falling below minimum wage as this would be illegal.

So for example; if a staff member is paid £10.00phr, the employer has employers NI, Holiday pay on top, and the worker has tax and NI calculated on a taxable figure of £10.00phr. If the worker submits to £3.00 per hours worth of expenses the new taxable pay rate is £7.00 per hour – reducing the figure NI and tax is calculated on. Saving tax and NI for both the employee and employer.

Is this legal? Yes. Subject to compliance with the conditions set by HMRC. But don’t take our word for it, just Google ‘dispensation’ and read the details on the HMRC website.